Why Valuation of your Business Important

Your organization may be a Start up toying with a Great Business Idea, with early success and a huge potential for growth. You may be an Organization already funded with Seed/Angel funding looking for Private Equity Series A, B or C. You may be an established business with a track record, now looking for a Merger or Acquisition to Consolidate or Exit. You may look at restructuring your Finance or a Loan or look for an additional Funding from Debt. Not only for financing but to know what value you as a Business are creating as Financial returns and Value creating to other stakeholders like owners, investors, employees and customers.

All the above require appropriate Valuation of your Business, periodically and bench mark where your firm stands compared to other players in the similar Industry structure. The value of the firm is not just financial valuation but depends on so many intangibles, to know how well your assets are delivering tangible and intangible benefits.

Large Businesses and publicly listed companies use their stock price, EPS and P/E as parameters and continuously follow valuation techniques to maintain their stock value and plan new lines of businesses, processes that enhance value. The valuation of large businesses are complex involving the valuation Trade marks, Branding, Good will, Customer base, market attractiveness, Human capital and so on and so forth, in addition to the tangible business value. Small and medium businesses may have to determine their valuation using standard approaches, which will not be that complex, engaging professionals for acceptability.

The Valuation of a bank or investment house differs from Manufacturing or Service industries. The Valuation of eCommerce, Net based business models, Service Industries, Consulting Firms, Healthcare practices, IT Software and Retail pose more complexities in Valuation as their intangible assets, Intellectual Property (IP), Customer Acquisition, Retention, Life time value of Customer etc comes into play in Valuation.

There is No single Answer as to what exactly is the value of Business. The Promoters perception of the business and prospects may be totally different from that of an Investor or a buyer. More often sellers loose as the real value of the business is not known and sale is “Fire Sales” or “Adverse or Distress Sales”.

How to address the above? There are certain Standard Valuation Techniques or approaches practiced all over the world to determine the value of the business.

Asset Based

Income Based

Market Based

Each method has its use for particular type of Business and it can give an indication of an estimated value of the firm, at any point of time. Your Past performance, Good will, Future projections and Prospects will determine the current valuation of your enterprise. This will help you in negotiations for Funding, Sale, M&A, Internal appraisals to Business partners and other stake holders.

Hence Valuation helps you to answer some of the questions that come up in following situations.

How do my partners, other stake holders and I agree on what our shares of the business are worth? (Internal Appraisal).

Can we appraise the business using standard techniques, approaches and avoid a legal battle? (Regulatory Compliance)

Will the tax authorities or courts accept my business valuation results? (Interpretation and permissible by Tax laws).

What is the right asking price for my business in M&A? (Win-Win Deals)